Will Bankruptcy Discharge Student Loans?

Most modern student loans are backed by the federal government, and thus paying them back is considered a serious obligation similar to taxes. With the economy in its worst shape ever, even those with advanced degrees are getting laid off from jobs and suffering decreased earning power. More middle-class people than ever are turning to bankruptcy, which has two major forms: Chapter 7 and Chapter 13. Chapter 7 is a legal liquidation of most consumer debts, while Chapter 13 restructures most debts into a court-supervised, affordable repayment plan. The reality concerning student loans is most will not be able to be included in any kind of bankruptcy case.

If someone is seriously disabled and will likely be unable to work enough again to repay their student loans, a bankruptcy court judge can set aside the legal obligation and include the loans in their case discharge. However, keep in mind that short of paralysis or a serious, incurable condition such as terminal cancer, it is unlikely that you will be considered disabled enough to not pay your student loans. Being on Social Security disability is not enough to be approved for elimination of your student loan obligations.

An additional exception that could apply to more people is if the school has closed down. The bankruptcy judge will then likely forgive the student loans in your petition.

Despite the grim realities concerning federal student loans not being widely discharged in bankruptcy, there is some good news for cash-strapped people. You can only have 10 percent of your wages garnished to repay a student loan obligation to the government. In addition, many private student loans or general loans used for education may be included in a Chapter 7 or Chapter 13 case. Any college credit cards and bills owed directly to a school can also normally be legally removed as a financial obligation or restructured into a Chapter 13 bankruptcy payment plan.